India cuts interest rates by more than expected

The Reserve Bank of India reduced its repo rate to 6.75 per cent from 7.25 per cent, with economists having forecast it would trim rates to 7 per cent.

According to The BBC, the repo rate is the level at which the central bank lends to commercial banks.

The bank has been under pressure to boost growth after inflation hit a record low of 3.6 per cent in August due to falling commodity prices.

The latest cut takes interest rates in the country to the lowest level in four and a half years.

The RBI had already cut the policy rate by a total of 75 basis points this year, following rate reductions in January, February and June, on the back of low inflation.

“In India, a tentative economic recovery is underway, but is still far from robust,” RBI governor Raghuram Rajan said in a statement.

“Investment is likely to respond more strongly (and boost domestic demand) if there is more certainty about the extent of monetary stimulus in the pipeline.”

Economic growth in India, Asia’s third largest economy, slowed to an annual rate of 7 per cent between April and June, down from 7.5 per cent in the previous quarter.

Consumer inflation is also well below the central bank’s target of 6 per cent for January next year.

Atsi Sheth of Moody’s Investors Service said the extent of the rate cut suggested the central bank thought underlying growth was still subdued.

“It also suggests that inflation is not the key risk at this time, in the RBI’s view,” he told Reuters.

Shilan Shah, an economist at Capital Economics, added that the latest cut implied the central bank might have reached a “turning point”, marking the end of its easing cycle.

“The accompanying statement appears to suggest that the RBI is passing the mantle on to the government and banking sector to drive a sustained economic recovery,” he said in a note.

Indian shares reversed losses after the central bank’s decision, with the benchmark BSE index trading flat at 25,607.93. The index had been more than 1% lower earlier in the session